Buying a Franchise: How to Assess Ongoing Fees

A low fee rate does not automatically make a franchise offer good value. What matters is the amount it applies to, any minimum charges and the rules governing changes to payments. Before signing up to a franchise network, work through the ongoing franchise fees using specific transaction examples. This turns a seemingly straightforward percentage into a sound basis for your investment decision.

1. Clearly define the basis for calculating fees

Franchise agreements may provide for fixed monthly charges, turnover-based fees or a combination of the two. For a turnover-based fee, wording such as “a percentage of turnover” is not enough to produce a reliable forecast. Ask for a clear explanation of how the agreement defines the relevant turnover.

In particular, check the following:

• Is the fee calculated on net turnover excluding VAT, or on an amount defined in some other way?
• Do discounts, refunds, returns and cancelled orders reduce the amount on which the fee is calculated?
• Does the calculation use invoices issued or only payments actually received from customers?
• How are bad debts taken into account after the initial calculation?
• Are vouchers recorded when sold or when redeemed, and how is double counting prevented?
• Which sales from online orders, intermediary platforms or centrally allocated orders are attributed to your business?

The treatment of platform commissions is particularly important. If an order is processed through a platform, the turnover used under the agreement may be higher than the amount paid into your bank account. A fee based on the order value affects your business differently from one based on the amount remaining after commission.

Ask for a sample fee statement covering a standard sale, a return and a platform transaction. The explanation must match the agreement. A helpful answer during a sales meeting is no substitute for clear contractual terms.

2. Consider minimum fees and payment dates together

A minimum fee can have a substantial impact, particularly during the start-up phase. First establish whether it simply sets a floor for the turnover-based fee or is charged on top. Also check whether a monthly minimum fee can later be offset against fees in months with stronger sales. Unless the agreement provides for this, do not assume it will happen.

Check when the obligation to pay begins. Are fees payable from the date the agreement is signed, once specified services have been provided, or only when the business opens? What happens if opening is delayed, the business closes temporarily or it operates for only part of a month? If your plans depend on a pro rata reduction or a fee-free period, this should be expressly agreed.

For cash-flow planning, prepare three monthly scenarios: weak trading, expected trading and strong trading. For each, record the contractual calculation basis, the resulting fee, any applicable minimum fee and the payment date. Also allow for any VAT charged on the fee invoice.

The payment date matters just as much as the amount. If you have to pay the franchise fee before your customers pay you, you will need additional working capital. Make sure your financing covers this rather than allowing a favourable annual average to obscure the shortfall.

3. Have fee adjustment clauses legally reviewed

Germany has no standalone franchise law. Franchise agreements typically combine elements of several types of contract. The principal rules come from the German Civil Code (Bürgerliches Gesetzbuch, or BGB), the German Commercial Code (Handelsgesetzbuch, or HGB), where relevant, and other general legislation. There is no special government approval process for franchise fees.

Sections 305 to 310 of the BGB apply to standard contract terms. Section 307 is particularly important for fee adjustment clauses: terms must be transparent and must not place the other party at an unreasonable disadvantage. In business-to-business dealings, the specific provisions of section 310 must also be taken into account. Whether a particular clause is valid requires a case-by-case assessment.

Search the draft agreement specifically for terms such as “adjustment”, “price list”, “indexation” and “fees in force from time to time”. Have a legal adviser check whether the grounds for an increase, its calculation and its extent are clearly defined. For cost-based adjustments, the treatment of falling costs also matters. For an index-linked clause, the reference index, starting value, adjustment interval and any further statutory requirements should be checked.

Where appropriate, negotiate notice periods, caps or a contractual right to terminate in the event of substantial increases. These protections do not arise automatically simply because an adjustment creates a financial burden. If you have concerns, do not stop making payments without taking legal advice.

4. Agree clear procedures for statements and corrections

Before committing, agree what information and supporting documents each fee statement should contain. You should be able to verify the starting turnover figure, deductions, fee rate, minimum charge and any corrections. Also clarify who reports errors, who investigates them and when credits will be refunded or offset against future payments.

Look out for short deadlines for raising objections or provisions under which a statement is automatically deemed accepted. Have their scope and validity reviewed. Wherever possible, agree a practical correction process for subsequent returns and bad debts.

A final comparison of different franchise brands should include a complete fee breakdown: which services does the ongoing franchise fee cover, and which mandatory services are charged separately? Resolve any unclear overlapping charges before signing.

Practical takeaway: Do not sign until you can check a monthly fee statement yourself, have budgeted for weak trading months and understand the contractual limits or rules governing any fee increases.